Vanguard's Managed Payout Fund[, opinions, experiences?]

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BlueCollarLawyer
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Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by BlueCollarLawyer »

I'm starting to realize that managing my mother's nest egg is more fraught than I expected. I'm looking into Vanguard's Managed Payout Fund.

She wants income of about $1500 per month on $500k gross savings, $320k in a taxable account, $92k in a tIRA, and $90k in a Roth IRA. Everything is invested in either VG Target Income or Wellesley Income across all accounts. Plus, she has some odds and ends that her former brokerage got her into, totaling about $125k, which we are selling down as best we can while avoiding a tax hit. The odds and ends are in her taxable account.

Does anyone have any experience with Vanguard's MP fund? Opinions?
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MossySF
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by MossySF »

In terms of the underlying investment, the Managed Payout fund is just a balanced fund with 10% allocated to weirder stuff and with an automatic withdrawal amount/percentage. It would be no different if you put your money into Vanguard Moderate Allocation and then withdrew $1500/mo.

In terms of the tax consequences, it may be a good option because much of the distributions are return of capital which are not taxed. You could do the same with any regular fund but it would require manual withdrawals every month with you picking the specific tax lots.

You have to decide whether the 60 stocks/30 bonds/10 weird stuff allocation is appropriate first.
lack_ey
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by lack_ey »

If you think any of it is weird, I don't think you'd stop at assessing it at 10%. It certainly doesn't have 30% in bonds, though it used to. Here it is, anyway:

Image

It's long about 60% stocks. Looks kind of like some institutional-style asset allocations. It's managed by Vanguard's internal quantitative equity team.


Anyway, you can easily generate $18k a year from $500k by selling some regularly. No need for a fund to do that for you. I wouldn't pick Managed Payout unless that's the kind of allocation you want to have.
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MossySF
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by MossySF »

lack_ey wrote:If you think any of it is weird, I don't think you'd stop at assessing it at 10%. It certainly doesn't have 30% in bonds, though it used to. Here it is, anyway:
Oh, I switched out at last year when it was still 30% bonds. I haven't kept up to date on the continual in-creep of strange stuff.
Miriam2
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by Miriam2 »

John Bogle, "The Twelve Pillars of [Financial] Wisdom"- Pillar 5: Diversify, Diversify, Diversify.
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ClevrChico
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by ClevrChico »

BlueCollarLawyer wrote:I'm starting to realize that managing my mother's nest egg is more fraught than I expected. I'm looking into Vanguard's Managed Payout Fund.
My mom has been in this fund for five years. (Or one like it that got merged into this fund.) I do like the auto pilot feature of this for a partial nest egg, it's one less thing we have to worry about. Many are not huge fans of this fund, as there are cheaper funds with less weird components, that can do the same thing with more manual adjustment.

That said, I like it. It's probably better than the next closest "hands off" product, the annuity. In her situation, she pays no taxes on the returns. The fund overview fits her goals exactly:

"The Managed Payout Fund is designed to give you regular monthly payouts that can help you manage a portion of your retirement expenses. The fund is intended to supplement your other sources of retirement income.

The Managed Payout Fund targets an annual distribution rate of 4%. To accomplish this, the fund’s portfolio managers aim to adjust the fund’s overall asset allocation over time with an emphasis on sustaining its monthly payouts, keeping pace with inflation, and preserving capital over the long term."
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Phineas J. Whoopee
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by Phineas J. Whoopee »

No, ClevrChico, in fact they do not achieve their aim that you quote.

They return capital to maintain payouts.

It's exactly the same as if investors in the fund sold shares themselves, which is not a bad thing to do.

PJW
mickroark
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by mickroark »

This is an excellent fund for a Roth IRA. I have about 40% of my Roth IRA in this fund, and I receive a monthly check. No taxes due. So far I have no complaints, but be careful and talk with your adviser, to see if this fund is appropriate for you.
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MossySF
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by MossySF »

Phineas J. Whoopee wrote:They return capital to maintain payouts.

It's exactly the same as if investors in the fund sold shares themselves, which is not a bad thing to do.
And in a taxable account, this is a good idea. Return of capital is not taxed. Gains and dividends are. Obviously a mutual fund has no choice but to distribute dividends every year so you can't avoid tax on that. But gains should be pushed into the future -- and if possible, onto fellow fund holders who happen to own it in tax-advantaged accounts (similar to the fund class <--> ETF class trick Vanguard uses).
jjface
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by jjface »

I'd rather just stick with Wellesley. Though it doesn't manage for a 4% payout it has performed very well and distributed about that or more for a long time (including capital gains). The distributions will be December heavy rather than spread monthly.

Though I like the idea of the Vanguard managed payout fund the execution could be much better. Far too much actively managed junk and it is very stock heavy and I doubt it would feel suitable for a conservative investor.

Or you could simply put it into one all in one index fund (target retirement income, lifestrategy conservative, lifestrategy moderate growth orbalanced index) and at the beginning of the year withdraw about half her yearly expenses to her checking account and then set dividends (about 2%) to automatically be deposited into her checking account each quarter/month. Easy. You'd have to keep an eye on the yearly withdrawal and performance to make sure you are not taking too much but other than that it should be okay to go on autopilot. Since she is only looking for about 3.6% then she should be good without too much monitoring.
FRANK2009
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by FRANK2009 »

I just placed 25% of my portfolio in this fund. It's an endowment style investing fund with a diverse mix of assets. It should do about as well as anything Vanguard has to offer.
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by nisiprius »

No experience, I have a mixed opinion. My opinion is that this is not a fund that someone should choose for someone else; it should only be considered by someone able to form a judgement of their own. It is as far I know almost unique; it was "innovative" when introduced and to me "innovative" is a bad word in investments.

In the eight years since introduction, investors have only invested $1.7 billion, compared to Vanguard's other three retirement income funds: LifeStrategy Income, $3.8 billion; Target Retirement Income, $10.8 billion; Vanguard Wellesley Income, $49.6 billion. Thus it is fair to say it has not been a great success. Another indication that it has not been a great success is that it was originally three different funds, and Vanguard decided to merge them into one.

The most important thing to understand about this fund is that the traditional approach to retirement income is to invest in a relatively low-risk portfolio that earns a relatively stable stream of income, and spend that stream. This fund invests much more aggressively. The value of the fund and the actual direct earnings of the fund fluctuate a lot. The fund compensates for this by paying out a "managed" amount that is more stable than the actual earnings. That means that in bad years it spends capital--in effect it "invades the principal." It takes a calculated risk, but still a risk, that effect of spending down capital in bad years will be made up for by later gains in good years.

Vanguard is, I think, not as straight as I'd like them to be when it presents a calculator like this, even though they use the word "estimate" and state that the $1,000/month is an "initial" amount:

Image

Of course, they give a very long disclaimer, which needs to be taken seriously and read from beginning to end. An important part of the disclaimer is as follows, where I've boldfaced some phrases:
The Managed Payout Fund isn't guaranteed to achieve its investment objectives and is subject to loss. In addition, some of its distributions may be treated in part as a return of capital. The dollar amount of the fund’s monthly cash distributions could go up or down substantially from one year to the next and over time. It's also possible for the fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed-distribution policy.
When I say it needs to be taken seriously, note that the fund actually downsized the estimated size of its payouts in 2014, from 5% of the invested amount to 4%.

How you feel about the fund really depends on how you feel about the portfolio and investment strategy of the fund. It implements an investment strategy that has become popular, with some similarities to the strategies used by the Yale University and other university endowment funds. It relies on using more aggressive and riskier investments than are traditional in retirement portfolios. The risk is supposed to be mitigated by the inclusion of non-traditional investments with low correlations to traditional investments, and, when used for retirement income, by the "managed payout" system which smooths out the payments.

Again, in my personal opinion, the fund should only be bought by someone who understands the disclaimers, the statement that the dollar amount of the payouts could go and in the past actually have gone "up or down substantially from year to year," and is able to read and form a personal opinion about the suitability of the fund's portfolio (not rely on someone else's opinion). According to Vanguard, the current portfolio is:

Image

1 Vanguard Total International Stock Index Fund Investor Shares 20.1%
2 Vanguard Total Stock Market Index Fund Investor Shares 20.0%
3 Vanguard Global Minimum Volatility Fund Investor Shares 15.2%
4 Vanguard Total Bond Market II Index Fund Investor Shares* 12.1%
5 Vanguard Alternative Strategies Fund* 10.0%
6 Vanguard Market Neutral Fund Investor Shares 6.6%
7 Vanguard Total International Bond Index Fund Investor Shares 5.9%
8 Vanguard Emerging Markets Stock Index Fund Investor Shares 5.1%
9 Commodities 5.0%
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dbr
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by dbr »

It would be a great mistake to think this fund offers some kind of unique benefit to the investor who wants a practical solution to the basic act of using a portfolio to supply income.

Perhaps you can expand on what is "fraught" about the current situation.

If the dilemma is that she wants to withdraw at a rate of about 4% of the assets and the current dividend payouts of those funds are about half that, then you have to do nothing more than sell some shares to make up the difference. The managed payout fund does exactly the same thing except less constantly than you can arrange yourself. Selling shares in a taxable account may not have a high tax cost as part of the sale is return of already taxed principal and the rest is taxed at capital gains rates.

I don't know how old your mother is, but an alternative for people whose primary objective is steady income would be an SPIA. Currently $1500/mo. could be obtained for a single woman aged 65 with an investment of about $350,000. Very often one does not attempt to get the entire income from the annuity. A major issue is inflation. The annuity I mention is not indexed for inflation but is guaranteed for life. It is probably reasonable that one can withdraw 4% that is indexed for inflation from a balanced portfolio not too low in stocks for 30 years or longer. There is some risk with that.
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stemikger
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by stemikger »

John Bogle just did a Webinar hosted by Vanguard to celebrate his 65 years in the business and during the cast, he said he does not believe in commodities, gold and these newer alternative investments. Being Managed Payout holds all three, you would not get Jack's blessing.

Just hold two or three funds or one balanced index fund and hold the AA that meets your goals and more importantly allows you to Stay the Course. There is nothing magical about this fund.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by nisiprius »

stemikger wrote:John Bogle just did a Webinar hosted by Vanguard to celebrate his 65 years in the business and during the cast, he said he does not believe in commodities, gold and these newer alternative investments. Being Managed Payout holds all three, you would not get Jack's blessing.

Just hold two or three funds or one balanced index fund and hold the AA that meets your goals and more importantly allows you to Stay the Course. There is nothing magical about this fund.
Does Managed Payout hold gold? I didn't think so but their investment policy is sufficiently "go-anywhere" that anything is possible.

I don't want to be totally negative about Managed Payout and someday I might end up using it although I really dislike the portfolio. I sure wish Vanguard offered something similar with a "normal" portfolio. Managed Payout is, as far as I know, at present, the only way to get an
a) fully automatic,
b) somewhat stable,
c) monthly payout
from a portfolio that includes both stocks and bonds.

Bond funds pay monthly but 100% bonds is not suitable for most investors. Wellesley pays quarterly and the actual dividend payments seem fairly stable, but even Wellesley suffers from the problem of capital gains distributions at the end of the year meaning that in effect every fourth payout is larger than the rest.

Image
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MossySF
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by MossySF »

I used to be in Managed Payout in my tax-deferred accounts because I "thought" wanted the weird stuff.

But after comparing Managed Payout versus the 60/40 Lifestyle fund, there's not much difference ... and in that case, I'll take the lower cost fund.

I think in order for the weird stuff to make a difference to flatten the line, the percentages have to be higher.
lack_ey
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by lack_ey »

MossySF wrote:I used to be in Managed Payout in my tax-deferred accounts because I "thought" wanted the weird stuff.

But after graphing Managed Payout versus the 60/40 Lifestyle fund, there's not much difference.

I think in order for the weird stuff to make a difference, the amounts have to be higher. Then you could treat it like a true pension-style 60/40 automatic withdrawal fund.
The asset allocation has changed over time. Used to just be 10% in the equity market neutral fund.

Part of what you're seeing the last few years is the 5% commodities and 5% emerging markets stock (in addition to the weighting within the other stock funds) dragging down performance. Also, both stocks and bonds doing well going back 5+ years. Not much benefit to be had from alternatives when your main stuff is powering through just fine. The global min vol fund did great, though.

But you do have a point that any kind of these shifts in the 10-20% range are a bit hard to see, realistically.
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BlueCollarLawyer
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Re: Vanguard's Managed Payout Fund[, opinions, experiences?]

Post by BlueCollarLawyer »

Thanks for all the replies.

After reading through the other threads pointed out above, we're going to stay with our current approach which is Wellesley and Target Income.

What I mean by "fraught" is I don't like having to monitor her account. I thought Managed Payout might be a simpler way of handling her money. But the downside, as discussed here, seems to outweigh the simplicity.
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